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Thursday, 22 March 2012

UAE: Dubai as the Dispute Resolution Centre for the Islamic Finance Industry

The below is an abridged version of the original piece written by the author. Detailed information about the courts, cases, processes and judge rulings were omitted.

There is no doubt that the Islamic Finance Industry is booming worldwide. However, to the industrys detriment, there does not exist a sufficient regulatory framework through which to solve disputes in Islamic Finance transactions. If this situation persists, the Islamic Finance Industry will not survive.

Currently the practice is to have Islamic finance disputes settled by the Law of England and Wales or the State of New York. Inserting these two jurisdictions in the governing law clauses of Islamic Finance contracts is a grave mistake. These two jurisdictions generally do not recognize Shari'ah laws as a system capable of governing a financial transaction. However, the Islamic Financial transaction itself is rooted in Shari'ah law and principles as well as the Quran. Therefore, some aspect of Shari'ah must be applied in settling an Islamic Finance dispute.

Furthermore, a judge in England and New York may have had no exposure to Islam, Islamic Finance, or Islamic culture except in a negative light. Therefore, when an Islamic Finance dispute goes before a judge in England or New York, the transaction by default turns into a conventional transaction irrespective of the Shari'ah upon which it was structured.

According to the Appeal Case, the Court ruled that an Islamic Finance contract could not be governed by Shari'ah law in the UK even if so specified in the contract and that in fact Shari'ah law is not a recognizable form of law that contains principles of law capable of governing a commercial dispute in the UK.

Article 3.1 of the Rome Convention (which by s.2 (1) of the Contracts (Applicable Law) Act 1990 has the force of law in the United Kingdom) contemplates that a contract shall be governed by the law chosen by the parties and Article 1.1 of the Rome Convention makes it clear that the reference to the parties choice of law to govern a contract is a reference to the law of a country.

There is no provision for the choice or application of a non-national system of law such as Shari'ah law. English law is a law commonly adapted internationally as the governing law for banking and commercial contracts, having a well-known and well-developed jurisprudence in that respect which is not open to doubt or disputation on the basis of religious or philosophical principle.

Need for Arbitration center

It is advisable to create a world-recognized Islamic Finance Arbitration Center (the Dubai World Islamic Finance Arbitration Center (DWIFAC)) staffed with the worlds top Shari'ah scholars to settle disputes in Islamic Finance Transactions/Contracts. This world-recognized Islamic Finance Arbitration Center should be based in Dubai, transforming Dubai into the pinnacle of the Islamic Finance Industry, surpassing Malaysia, Bahrain, and Saudi Arabia, and turning Dubai into the dispute resolution center for the all the worlds Islamic Finance Transactions. The Dubai World Islamic Finance Arbitration Center (DWIFAC) could have its own set of rules and could have a Jurisprudence Office and Islamic Finance Education Institute attached to it.

It is imperative that the UAE legislate its own Federal Islamic Banking Law in conjunction to forming DWIFAC so that the parties to an Islamic Finance contract can designate the Laws of the UAE as the substantive law governing the Islamic Finance Contract. For instance, when drafting the governing law clause of an Islamic Finance contract, it would become standard for the industry to put the Laws of the United Arab Emirates as the governing law of the contract and designate the Dubai World Islamic Finance Arbitration Center (DWIFAC) and the rules of the DWIFAC as the dispute resolution body and applicable procedural law. Most, if not all of the top Shari'ah scholars have been highly educated in both Shari'ah law and conventional western finance and law and are highly capable of resolving Islamic Finance Disputes. Dubai would also save the Islamic Finance Industry by providing effective, streamlined dispute resolutions which preserve Islamic Finance concepts and through this would ensure the Islamic Finance industrys survival into the future.

The UAE could make agreements with other nations to use DWIFAC as the designated dispute resolution center for Islamic Finance disputes and encourage the country in question to implement the Federal Islamic Banking Law of the UAE into their domestic legal systems. As it stands now, even the UAE does not have an Islamic Banking law, however, it has a law allowing Islamic Banks to exist. The secretary-general of the Fatwa and Shari'ah Supervision Board in the UAE, Mabid Ali Al Jarhi has called for modifications to some civil laws and the introduction of an Islamic banking law. Al Jarhi said that Islamic banks are presently guided by their own Shari'ah boards and have policies that often differ from those of other Islamic finance houses. Therefore, attached to the Islamic Finance Arbitration Center, there should be an Islamic Finance Jurisprudence Officeentrusted with the task of creating a unified Islamic Banking Lawand to have it implemented in all countries around the world which are commercial centers. This law may incorporate the AAOIFI standards and/ or be based on the 1985 law which was never officially enacted.

The Example of Bahrain

Currently, the Kingdom of Bahrain surpasses the UAE as a hub of Islamic Finance, as Bahrain houses AAOFI, the Accounting and Auditing Organization for Islamic Financial Institutions and the very popular Bahrain Institute of Banking and Finance (BIBF). Bahrain also recently launched Bait- al- Bursa, the first Islamic Finance Division of a stock exchange (BFX) to exclusively offer electronically traded Islamic Financial instruments. It currently monopolizes all the exchange traded business in the Islamic finance sector. Furthermore, Bait al Bursa recently launched e-Tayseer, which is a fully automated platform for transactions in supply, purchase and sale of assets for facilitating Murabaha transactions. E-Tayseer allows suppliers to place their assets onto the platform ready to be purchased by financial institutions. Financial institutions can then purchase these assets and conduct Murabahah transactions with counterparties to fulfill their liquidity management requirements in a secure online environment.

Dubai World/Nakheel Default

The Dubai World/Nakheel debt re-structuring was essentially an Islamic Finance Dispute over a default in a Sukuk issuance. Instead of creating an ad-hoc tribunal based on a version of the DIFC insolvency laws; this matter could have been handled at the Dubai World Islamic Finance Arbitration Center (DWIFAC).

Blom Bank Judgment

In the case of Investment Dar Co KSCC v Blom Development Bank Sal [2009] EWHC 3545 (Ch) High Court of Justice Chancery Division, TID successfully claimed that to uphold the Wakalah that it had entered into with Blom Bank would be un-Islamic and a breach of its statutes. TID won the appeal case largely because the dispute was administered by an English Court where the judge had absolutely no understanding of Islamic finance and applied conventional finance and common law to the dispute which by default turned the transaction into a conventional transaction.

Conclusion

It is advisable to create a world-recognized Islamic Finance Arbitration Center (Dubai World Islamic Finance Arbitration Center (DWIFAC))to be set up immediately in order to handle current Islamic banking disputes staffed by the worlds top Shari'ah and Islamic Finance Scholars. Currently, there is an Islamic Finance Arbitration Center in existence, but it is not widely used or recognized. Other people are working on this concept now, such as in Cairo and possibly other locations, therefore, the process must be swift and speedy with immediate action and implementation in order to lift Dubai to the forefront of the Islamic Finance Industry. In addition, a unified Islamic Banking Law should be enacted in the UAE as soon as possible. Attached to the DWIFAC, it is advisable to have a Jurisprudence Office to oversee the creation and implementation of the Islamic Banking Law in the UAE and worldwide as well as oversee the creation of an Islamic Division to all UAE stock exchanges including the NASDAQ, the Abu Dhabi Securities Exchange (ADX) and the Dubai Financial Market (DFM).